This study provides evidence that reporting openness can have the unintended effect of increasing collusion. Recognizing that reporting openness can have a downside can help executives make more informed decisions when considering how much organizational openness they want. Furthermore, this study demonstrates that, despite increasing trust and reciprocity among managers, open internal reporting can potentially result in more managerial collusion because openness fosters greater “honor among thieves.”

The authors examine whether open internal reporting, in which a manager observes another manager’s communications with senior executives, increases collusion between the managers. Open internal reporting environments certainly have benefits, but they can also expose firms to collusion, which is a significant control problem for firms. For this reason, documenting how open internal reporting affects managers’ collusion is important because the related insight can help top executives decide how much internal reporting openness they want in their firm.

Design/Method/ Approach:

The authors use an experiment to examine the effect of reporting openness of misreporting and collusion because an experiment allows them to control the managers’ economic incentives and also to isolate the effect of social norms on managers’ behavior.

Findings:

The authors find that agreements to collude lead to more misreporting in the open than in the closed reporting condition.

The authors find that individual managers were more than twice as likely to honor their agreements to misreport in the open condition, and pairs of managers colluded successfully nearly five times as often in the open condition.

The authors find that open internal reporting facilitated managers’ collusion, which significantly lowered firm welfare in the open reporting condition.